Four
months into his new job as Dean
of the Wharton School,
Thomas Robertson
– a
former Wharton faculty member
– is
already committed to raising $550 million for the
school, part of a university-wide effort to raise $3.5
billion total. At the same time, The Wharton School is
facing key questions about how to respond to the need
for high quality business education around the globe.
Leadership Digest editor and
Wharton management professor Michael Useem spoke
with Robertson to ask him his leadership background,
surprises on the job, and his vision for globalizing
Wharton.

Michael Useem: You’ve been
in a leadership role for many years in several different
institutions, culminating now in your appointment
recently as the dean of the Wharton School. Looking back
on your career, what have been the most important
formative experiences in the development of your own
leadership prior to your arrival here?

Tom Robertson: I have
benefited from the privilege of being involved in other
schools. Being involved at Wharton as a faculty member
for a number of years was tremendously advantageous, as
I arrived here and already knew a reasonable number of
the faculty and staff. At Wharton I had served as vice
dean of
executive education, and, in that role, had brought
about a lot of change in the way we thought about
executive education. That was a meaningful experience,
and I think a successful experience.

I then went to
London Business School, where I was deputy dean,
with all of the school’s degree and non-degree programs
reporting to me. I was developing capabilities in an
international environment, in that only about 12 percent
of London Business School students are British.

Then I went to Emory and was dean
of Emory’s
Goizueta Business School for seven years, stepped
down, and then headed international strategy for Emory
University as a whole and founded the
Institute for Developing Nations with President
Jimmy Carter, the Carter Center being part of Emory
University. In arriving at Wharton, what I bring to bear
is a fair amount of management experience, international
experience, and experience at the school level and at
the university level, so not only at the subsidiary
level but also at headquarters.

Useem: Since your arrival
here a couple months back, what have been the most vital
aspects of your leadership in terms of taking charge?
What have been the key personal capacities that have
been vital to your own leadership of the school?

Robertson: The first thing
that helps is if you arrive with some level of
legitimacy or credibility. Given that I had been a
faculty member not only here, but also at a number of
other institutions including Harvard and UCLA and the
London Business School, I was not an alien being to our
faculty or staff, but someone about whom, perhaps, they
could think, “He’s done it and perhaps knows what he’s
talking about.” You start off with a fair amount of
goodwill. It is then up to you to prove you can indeed
lead the school.

For me it was then a matter, as
soon as I arrived, of reaching out. I spent a fair
amount of time at the cappuccino machine meeting faculty
this summer and getting to know the staff and then, as
students arrived, spending a lot of time with students.
In this first semester at Wharton, a fair amount of my
time has been spent internally getting to know members
of the community. Only now am I spending more and more
time on the road and reaching out to the broader
community.

I think if you’re going be
successful in this role, you have to be ready for long
hours, and you have to be ready for conflicting demands.
It’s a large, complicated school, which is wonderful.
It’s a fantastic school, and there are a lot of
different constituencies and a lot of different demands,
and sometimes you have to make judgments about what you
can fulfill and what you cannot fulfill.

In much of my life I’ve been
involved in sales. I started out selling men’s clothes
once upon a time, when I was in college, and also
selling diamonds. It’s not that I’m necessarily now
selling academics, but as I’m on the road cultivating
donors and trying to raise money to benefit the school,
it helps to have a little sales experience and to be
willing to ask for the sale, which is not always true
for some people.

Useem: Let me ask about what
every job has, which is a couple surprises and a couple
challenges. In the months since taking charge here, what
have been one or two of your bigger surprises, and what
are a couple of the challenges you see ahead?

Robertson: As I arrived
there was an unusual situation: For a variety of reasons
there was no one here in terms of the senior management
team. So although I was supposed to be on vacation
during July – I had accepted
the job at the end of June – I spent most of August on
the phone lining up a senior management team. That was
probably the biggest surprise in getting started.

Since then, the biggest surprise
has just been the sheer involvement level that’s been
necessary in the school; there are very, very many
things going on at Wharton. We have 100 student
conferences a year, or we’re hiring so many faculty, or
you name it. We just do so many things, and everyday I
learn something new in terms of activities at Wharton.
Just getting up to speed on all of that and being able
to contribute and help direct some of these efforts has
been a wonderful challenge.

Useem: I’m going shift gears
here and ask you about some of the criticism that’s been
leveled at American business schools recently. The
health of business education in the U.S. is good,
despite the fact that some critics of American business
schools have suggested they have become too academic.
Others have argued they’ve lost their intellectual edge.
Still others worry that we tend to be focused too much
on U.S. experience. What’s your own assessment?

Robertson:
This debate about whether we should be theoretical or
applied has been going on for a very long time, so in a
sense it’s nothing new. If we go back a number of years,
to roughly around 1960, with the Ford and the Carnegie
Foundation reports that were very critical of business
schools at that time, much of the criticism was that
business schools looked too much like trade schools and
lacked scientific method, rigor and the pursuit of new
knowledge.

Beginning in the ‘60s, business
schools changed fairly dramatically, and they brought in
people from other disciplines. They adopted scientific
methods and put a lot more emphasis on the creation of
new knowledge rather than just telling war stories in
class. I think all of that has been good.

Then we get into the 2000s, and
there are other criticisms. Have business schools gone
too far? One of the criticisms is that we conduct
research that is precise but precisely irrelevant. My
feeling is if there’s any place in society that should
be looking ahead toward meeting our long-term goals, it
should be universities, it should be business schools.
But that’s not to say our research is not relevant. Our
research must be relevant to the business community.
Otherwise, we should be in a department of sociology or
psychology or whatever.

We want our faculty to conduct
rigorous research to advance knowledge to benefit the
business community. We must create economic and social
value. That doesn’t mean there’s a payoff from our
research tomorrow or even six months out, but it does
mean we have our eye on the future and the potential
contribution to economic value in society and to a
specific value for business firms.

Useem: Given what you have
just said, what do you see as the vision for the
school? What’s your strategy for getting us there? In
particular, if you could offer your thoughts about what
the school should be doing to build its global reach and
its teaching and research in the areas of leadership and
innovation, which are two priorities for the Wharton
campaign, which is part of the Penn campaign to raise
several billion dollars for the university.

Robertson: Wharton has
created a wonderful, wonderful brand. It’s our most
prized asset. It’s certainly a billion dollar or
multibillion dollar brand, but it’s not for sale. We
very much want to nourish it and extend it and take it
around the world and become the best-known brand in
terms of business schools worldwide.

We have strategies in place for
doing that. Our
Knowledge@Wharton reaches over a million subscribers
now and is translated into four languages. We’re
designing a high school version, and we’re looking at
expanding into other languages. That’s part of what we
do. Another part of what we do internationally is run
international forums for our alumni and others; this
year we’re in Vietnam, Peru, and South Africa.

If you look at the Wharton School
on an inbound basis, we look very international. Forty
percent of our MBAs are international, as are 17 percent
of our undergraduates. We have the
Lauder Institute, a wonderful program focused not
only on business but also on arts and sciences, with an
emphasis on language, and many of our students choose to
work overseas. So inbound we look strong.

Outbound, we have been instrumental
in setting up and helping to design other business
schools, including the
Indian School of Business in Hyderabad,
Sasin Business School, part of Chulalongkorn
University in Bangkok, and
Singapore Management University. We have not put our
names on those schools as they’ve been designed, and a
debate among our faculty, which will continue over the
next few months, is whether we should put the Wharton
name in another part of the world.

I think the answer is, we will
certainly put points of presence in other parts of the
world. We’ll encourage research in other parts of the
world. Whether we will offer teaching programs or degree
programs is another matter. Business schools are
actually fairly small. We’re a relatively large one, and
we only have a couple hundred faculty. It would be
exceedingly difficult to send our faculty to teach,
let’s say, in India or China. Should we create a second
faculty in one of these countries? That’s one of the
questions our faculty is looking at. It is very much an
open question, and we’re looking at it very carefully.

We will develop the brand name. We
will encourage research internationally. It’s debatable
whether we will actually offer a degree program in other
parts of the world. Now we are doing non-degree
programs. We are doing executive education in China and
in India and in other parts of the world, but the whole
question is, would we do a degree program?

Useem: Two of the priorities
of the school going forward are leadership and
innovation. How do you see the next three or maybe even
four or five years playing out as we seek to strengthen
those areas?

Robertson: Let me start with
innovation. As our students arrive, one of the first
things we tell them is they’re going to work in
industries and technologies and product categories that
don’t yet exist. It’s very important that our students
be involved in the development and commercialization of
new technologies.

So we are working with the
engineering school. We’re working with the medical
school. We’re working with life sciences. The idea is
that technology or innovation will come out of those
domains, and our students are helping to develop
business plans and helping in the commercialization of
those technologies. The diffusion of innovation and the
commercialization of innovation is critically important,
and that must be a very, very important part of what
this school does. We have significant resources devoted
to that, as well as the
Mack Center.

When it comes to leadership, we
pride ourselves on leadership. This is part of the
admissions process. As a starting point we are trying to
bring in people who are going to be future leaders;
we’re not interested only in bringing in analysts. We
have major initiatives focused on leadership for our
students, as well as research underway on leadership. As
part of the campaign we have going on, we very much want
to find the funding to take our initiatives, which are
presently on the premises, and turn those into a Global
Leadership Institute.

Useem: Let me ask you about
one of the hallmarks of your administration’s view of
the world, and what business schools – and what we in
particular – ought to be doing. You have used the
phrase, “We want to become a force for good in the
world.” What are the steps you’re taking to help this
school play a bigger role in that arena?

Robertson: That’s a good
question. Actually, in five minutes, I’m meeting with a
set of students and faculty and the topic is social
impact, which is a little bit broader than being a force
for good in the world. The Wharton School is highly
involved in different parts of the world, starting in
West Philadelphia, in trying to take business ideas and
turn them to the benefit of society.

We work with the
School of Social Policy on campus. We work on a
program in nonprofits, which is part of that. We
have faculty who are working in other countries of the
world on social entrepreneurship. Next year our students
are hosting the
Net Impact conference on campus, so we’ll have 2,000
students here from around the world interested in
corporate social responsibility and business ethics.

There’s a lot going on. It’s an
area we want to invest in. It’s not something all of our
faculty are necessarily interested in, but it’s an area
where I think business schools can make a major
contribution.

I would like to talk just briefly
about developing economies. My experience in the last
couple years, coming out of Emory and the Institute for
Developing Nations, as well as after spending time in
Africa, is that the problems of developing countries
aren’t necessarily monetary problems. One example was
Ethiopia, where they were using maybe 30 percent of the
funds awarded to them by USAID, the British government,
the Scandinavian government, the United Nations and the
NGOs that were operating there.

Now some of that’s a problem with
the NGOs and the United Nations. They want to give money
for specific purposes, which may or may not be in line
with what the objectives in Ethiopia are. But more than
anything, the reason they couldn’t use the money given
to them was they didn’t have the management capability.
They didn’t have the management systems, and they didn’t
have the sense of entrepreneurship in order to use the
money and benefit the economy.

What some of our faculty are doing
is pursuing the notion of building capabilities in other
countries. It’s perhaps a little trite, the notion that
you don’t give someone who’s hungry a fish; you teach
that person how to fish. But I think that’s what we’re
about. We are about developing management capabilities,
teaching entrepreneurship, and helping developing
countries to stand on their own two feet.

Useem: Leadership is often
described as a team sport, with great teams vital to any
individual’s leadership. Thinking about the teams you
have around you – students, faculty, staff, alumni,
employees, the broader community – how can they best
work with you to achieve your vision for the school?

Robertson: It is how they
can best work with me, and how I can best work with
them. It is all about community and valuing every member
of this community, and it is about building consensus.
As a leader I can go running ahead and hope people will
follow me, and some will, but most won’t. It is a matter
of me understanding what the priorities of the community
are.

I can create a vision, but that
vision really emanates from this faculty and this
community. More than anything I must understand the
community. I must understand our faculty and their
objectives, and be the leader of helping provide the
resources to let the faculty, the staff, and the
students pursue the goals they are committed to.

Useem: A personal question
here at the very end. From your own experience, as
you’ve moved into a succession of leadership positions
in the university, what would be one piece of advice you
would offer somebody who’s about to move into a senior
leadership position at a university here or elsewhere?

Robertson: Most of my life
has been spent in academia, and I very much believe in
the model of the best and the brightest. We can talk
about strategic ideas all we want, but as a leader of
this institution for the next seven years I will succeed
or fail based on how brilliant the faculty are, how
brilliant the students are, and how brilliant the staff
are. It is all about the best athletes and having the
ability to bring in the best students and faculty and
staff and giving them the resources to succeed.

Implementation of course then gets
more involved. How do you compete against a limited
number of other schools for faculty? Yes, we want very
good students, but we want a diversity of students, and
sometimes that costs money. Where do we get the money to
bring in diversity from throughout the world and from
throughout our own society? How do we get the best staff
when we’re very often competing with the private sector?

But at the end of the day, I can’t
do anything on my own. It’s all through our faculty and
our staff and our students, who do a tremendous amount
at the Wharton School. We have over 100 clubs. They run
over 100 conferences, and there’s a lot of
entrepreneurial effort at the level of the student body.

Useem: Let me thank you on
behalf of our listeners and our readers for walking
through the areas of your own leadership, the leadership
of the school, and beyond.

Register now for the 12th
Annual Wharton Leadership Summit, to be held on June 18,
2008 at The Wharton School in Philadelphia.
Confirmed speakers include
Colleen Barrett of Southwest Airlines, David Gergen of
the Center for Public Leadership, S.A. Ibrahim of Radian
Group, and William Weldon of Johnson & Johnson. We look
forward to seeing you in June.

In
a world of near limitless communication options, both
business and military leaders can get their jobs done
more accurately and quickly than ever before imaginable.
With a simple “reply all” on an e-mail, you can execute
a decision, mobilize key colleagues, and share essential
information. While our new technological abilities are
undoubtedly a blessing, they can also, unwittingly, dull
our abilities in another sphere
– that of human connections. Technology may be
fast, but it is not always effective. My suggestion for
reviving the lost art of personalizing your message?
Drinking other people’s coffee.

Problems That Need Resolving

Let me share an experience from a
few years ago with you. As a logistics officer of a
Marine Corps artillery battalion, I was responsible for
the supply, maintenance and support of trucks and
weapons for the 500-man unit stationed outside San
Diego. This job, for which I had not been specifically
trained, included exercising fiscal oversight for the
entire battalion. Since my background was operations, I
have never paid much attention to logistics and supply.
My attitude was, “Just get me what I need.” What I
needed always managed to show up, so I didn’t stop to
think about how it got to me. Now, however, I had to
look under the hood and figure out exactly how it all
got done.

When I took charge of the
battalion’s logistics, I learned, to my distress, that
the battalion was seriously in the red. Mike, my supply
officer, a bright, young Ivy League-trained Marine,
explained to me that the battalion was actually in the
black, but because we had not yet been credited for
several cancelled orders, we appeared, on paper at
least, to be in debt. Mike expressed the urgency of
needing to square our accounts. The fiscal year
close-out was one week away, and we didn’t want to put
ourselves in jeopardy by not being able to balance the
books in time.

I questioned Mike, and he reported
sending one or two e-mails a week to the chief warrant
officer, who was responsible for crediting us for the
orders we had cancelled, to no avail.

“They
haven’t returned any of my emails,” he told me.

“Have you
called them?” I asked.

“Occasionally, but I prefer email, since with phone
calls I have no record of what I say and how they
responded.”

Mike’s point was a good one, and it
explains why many of us prefer e-mail over phone calls
or face-to-face contact; e-mail provides an easy and
instant record of every communication. Yet it was
equally obvious that, in this case, e-mails and even
phone calls were not getting the job done. In his zeal
for good record keeping, Mike had overlooked the human
element.

I told Mike we were going on a
short field trip, and that he should bring all the
documentation on the case. When we arrived at the Supply
Management Unit, a quick 10-minute drive away, we asked
to see the chief warrant officer.

“He’s busy
right now, but I’d be glad to take those documents for
you,” said the young sergeant who was his gatekeeper.

“We’ll
just wait here until he’s available; we’re in no hurry,”
I replied. “Do you have any coffee?”

The sergeant brought us coffee, but
we had clearly violated his comfort zone. He was used to
running interference for his busy boss, and he didn’t
seem used to having people simply camp out in the
office. The sergeant explained to a superior, his staff
sergeant, that we were waiting for the chief warrant
officer. The staff sergeant also tried to relieve of us
of our documents and send us on our way with
reassurances.

“No,
thank you, I’m not in a hurry. I just want to make sure
that I’m the one that briefs him,” I said as I sipped my
coffee.

A few minutes later, another senior
Marine appeared, this time a master sergeant.

“Sir, the Chief Warrant
Officer is in a meeting. Can I take care of this for
you?”

I thought
about it. “Do you have final authority over our
discussion?”

“No sir,”
he said, “but the OIC (officer in charge) usually goes
with my recommendation.”

“Thank
you, Master Sergeant, but I think we’ll just wait. My
lieutenant has worked hard for the last month to fix
this, and since it’s now my issue I’d rather leave here
knowing the final outcome.”

When the chief warrant officer
finally returned, he was met by a flurry of staff
telling them about this captain and lieutenant who were
just sitting around, drinking coffee. The officer,
pressed by his staff, regarded us for a moment. While he
might have been able to strong arm a freshly minted
lieutenant, he wouldn’t be able to do the same thing
with a captain. We watched as he ordered his entire
staff to quit what there were doing and get our problem
taken care of right away. He even apologized to us
numerous times for our long wait.

We left the office with our problem
solved and our battalion in the black. The benefits,
however, did not end there. Mike and I had developed a
new ally, one that was more than just an email address.
Like most people, the chief warrant officer was eager to
help
– once he had made a real connection with us.

It’s easy to ignore an email, or
tell your subordinates to take a message for you, but it
is pretty hard to resist helping someone who is waiting
patiently for you in your office. Since that first
sit-in with Mike, I’ve dropped in to say hi to the
warrant officer from time to time, so he knows I don’t
just come by when I need something. When it comes time
to square our accounts, those five-minute visits go a
long way in smoothing the process.

So yes, go ahead and send that
e-mail, make that phone call, but don’t forget to swing
by sometimes to drink someone else’s coffee.

Author’s Note: Major Douglas
G. “Lucky” Luccio most recently
served as the operations officer for the U.S Marine
Corps Officer Candidates School in Quantico, Virginia,
and he holds a Masters in Leadership from the
McDonough School of Business at Georgetown University.
Major Luccio will be deployed to Iraq as a military
advisor for seven-month tour beginning in February, 2008
and can be reached at
dgl4@georgetown.edu.

A
leading expert on innovation, John Kao has taught a
popular course on the subject at the Harvard Business
School for fourteen years, in addition to teaching at
the MIT Media Lab and U.S. Naval Postgraduate School in
Monterey, California. Kao is founder and CEO of
Kao & Company, which advises top-tier Fortune 500
business leaders as well as government leaders around
the world, and specializes in instructing organizations
in the methods for making innovation happen. In his new
book,
Innovation Nation: How America Is Losing its Innovation
Edge, Why It Matters, and How We Can Get it Back,
many leaders, both national and international, “have a
dangerously limited understanding” of what innovation
is. Below is an excerpt from his book.

Innovation is always in a
state of evolution, with the nature of its practice
evolving along with our ideas about the desired future.
That is why innovation has meant different things at
different periods in our nation’s history, a state of
flux that has made it difficult to fashion a consensus
around any one meaning of innovation itself.

Version
1.0 of our national innovation capability, for instance,
featured individual visionary inventors. Central casting
gave us Benjamin Franklin and his kite, what we might
call the artisanal model of innovation.

Geniuses in their workshops
and garages, men like Thomas Edison and Henry Ford,
later came up with inventions that inspired large-scale
enterprises, ushering in Version 2.0 –the industrial
model of innovation. Business requirements gave rise to
mammoth, centralized corporate research groups that
reached their zenith in such venerable institutions as
Bell Labs, HP Labs, and the Xerox Palo Alto Research
Center (PARC).

In the days before CEOs obsessed about shareholder value and financial
metrics, some of these centers were true hotbeds of
innovative R&D. Engineers and scientists were encouraged
to follow their instincts, budgets were loosely
scrutinized, and indulgent managers protected talented
visionaries from cost-cutting bean counters. A story
told of Bill Hewlett –
who, along with Dave
Packard, founded Hewlett-Packard –
describes the
creative atmosphere that once prevailed. Upon finding a
locked storeroom at HP Labs, Hewlett is said to have
returned with bolt cutters to destroy the lock. He
wanted his engineers to be able to wander at will and
make serendipitous discoveries, no authorization and
voluminous forms needed.

In the public sector, the move
to large-scale, organized innovation was expressed by
the creation of the National Science Foundation, the
National Institutes of Health, and other centralized
edifices of government that provided national funding
and administrative functions.

Version 3.0
deinstitutionalized innovation and featured the
innovator-entrepreneur, financed by venture capital and
devoted to the “just-in-time” organization. In this
world, while corporate giant Xerox PARC developed the
graphical user interface, upstart Apple Computer
commercialized it. Big pharmaceutical companies got out
of basic research, preferring to innovate by buying
upstart biotech companies with valuable technology. In
other words, it was innovation by merger and
acquisition, not by R&D. And in another twist, Procter &
Gamble, historically a bastion of proprietary knowledge,
announced a plan to find the majority of its innovations
from outside its corporate walls. More recently, Version
3.0 has seen the rise of entrepreneurial communities and
open networks enabled by the Internet and new kinds of
digital collaboration tools, such as Groove, MySpace,
and the explosive expanse of social networking in all
its forms.

Version 4.0, where we are
today, is fast evolving – in beta, as techies are fond
of saying. Many of the most important contributors to
the process, however, reside outside the United States.
Indeed, 4.0 is fundamentally about adapting to new
innovation business models that may originate anywhere.
It is driven by a global diffusion of innovation
capability that has ended America’s monopoly. For China,
the key innovation model today may be a kind of brute
force that comes from increasingly sophisticated massed
minds working together. For Singapore, it is competitive
specialization – for now in biotech, digital media, and
environmental technology – as its vehicle to ride the
rising tides of globalization. For India, it is building
on the booming outsourcing industry. And oil-rich
nations have a time-limited opportunity to buy into the
game.

Countries everywhere are
seeking their own sources of comparative advantage in
the innovation landscape. And the logic of self-interest
is clear.
Robert Solow won the Nobel Prize in economics for,
among other things, demonstrating that as much as 80
percent of GDP growth comes through the introduction of
new technologies. And the Boston Consulting Group, in a
study conducted for BusinessWeek, concluded that
innovative companies achieved median profit margin
growth of 3.4 percent as compared with 0.4 percent for
the median S & P Global 1200. Furthermore their
annualized stock returns of 14.3 percent were a full 3
percent better than the S & P 1200 over the same decade.
So innovation pays.

Warren Buffet once observed that
“Risk comes from not knowing what you’re doing.”

Recent events in the U.S. and
global credit markets have clearly demonstrated that
some business firms have better risk management
practices than others. In effect, they have a better
sense of what they are doing. Faced with the same
economic landscape and the same set of investment
options, for example, one key U.S. financial services
firm, Goldman Sachs, has prospered while others have
floundered. Since August of this year, a time of
increasing stress in the credit markets, Goldman Sachs’
share prices have been trending upwards while those of
Citigroup, Merrill Lynch, and Bear Stearns have been in
steep decline.

If there is an upside to these
turbulent times, it is that more and more firms are
taking a comprehensive look at their total risk profile
and developing systemic approaches to handling those
risks—a process known as “enterprise risk management” or
ERM. In September 2007,
The Conference Board released a report titled
Risky Business: Is Enterprise Risk Management Losing
Ground?, which documents the progress of enterprise
risk management in recent years and offers helpful
suggestions on current ERM best practices.

What follows here is a brief
overview of that report and some of its key findings,
along with implications for leadership.

The Progress of a Concept

The 65-page report, authored by
Ellen S. Hexter, director of The Conference Board’s
Integrated Risk Management Center of Excellence, begins
by covering the who, what, and why of enterprise risk
management. The second half of the report, titled “Where
to Start,” is a useful compendium of information for
companies wanting to improve their risk management
practices, including ERM communication, ERM integration,
risk appetite, risk quantification, and implementation
challenges. The appendix contains a helpful example of
an annual report section on risk management, complete
with an informative graphic illustrating how to convey
the impact and likelihood of gross and net risks.

One of the many valuable aspects of
the report is that it compares and contrasts a 2006 ERM
survey with another conducted in 2004. The more recent
survey was sent via e-mail to risk, audit, and finance
executives, with 200 companies responding as of February
1, 2007. The 2004 study was a series of telephone
interviews with 271 executives on risk management
practices.

Regarding the 2006 survey
demographics, most respondents’ headquarters were in
North America (70 percent) and Europe (22 percent). The
sizes of the companies varied from 22 percent of the
respondents with less than $1 billion to 14 percent of
respondents with more than $20 billion of annual
revenues. The 2006 survey respondents were primarily
finance or risk executives (93 percent).

A Few Key Findings

So, is enterprise risk management
losing ground? Overall, the answer is a resounding
“No.” The main finding is that since the 2004 study
there has been “observable progress in driving ERM into
corporate practices and culture.” Writes Hexter: “Boards
of directors show increased involvement in enterprise
risk management today versus our study in 2004.”

Executives in the 2006 study
reported that 34 percent of their corporate boards
“believe that ERM is significant or highly significant
in carrying out their stewardship roles.” That number
shows a five-point increase over 2004, when 29 percent
of executive said the same thing. “Almost universally,
our study shows that there is a greater awareness of
risk across companies,” writes Hexter. “Two thirds of
the respondents say that individual risks in their
companies have individual owners.”

Although the 2006 survey shows good
progress in ERM practices, there is still room for
improvement. “Few of the surveyed companies have
attained an ‘advanced’ ERM status, based on the degree
of ERM integration into business processes, the use of
quantitative techniques, and the effects of risk
management on business outcomes,” reports Hexter.

Some differences were regional,
with companies headquartered outside North America
developing processes “at a faster pace,” with more that
are already “up and running.” The maturity of ERM across
industries was also variable, with financial services,
energy and utilities having “more developed ERM
processes than other industries.” In sum, writes Hexter,
“While companies report progress with ERM, it has yet to
become embedded in most companies’ day-to-day activities
and cultures. Progress has occurred in early stage
efforts, such as creating a risk inventory and
assessment practices.”

Probably one of the biggest
indicators that there is room for improvement is that
the financial services industry is considered to have
more developed risk management processes than other
industries, and yet this industry has suffered some of
the most visible and public risk failures.

Leadership Implications

As recent headlines demonstrate, it
is better to have a good set of proactive enterprise
risk management practices than a set of reactive,
expensive bailouts and embarrassing CEO dismissals.

Consider the following facts and
resulting leadership outcomes. In 2006, Goldman Sachs,
led by Lloyd C. Blankfein, had the good sense to go
bearish on the risky subprime-based securities that
Citigroup, Merrill Lynch, J.P. Morgan, and Bear Stearns
kept holding and promoting. Since the meltdown of the
subprime mortgage market earlier this summer,
Citigroup’s Charles O. Prince III and Merrill Lynch’s E.
Stanley O’Neal lost their top leadership jobs. Citigroup
required a huge $7.5 billion cash infusion from a
sovereign fund in Abu Dhabi. Merrill Lynch had an
eye-popping $8.4 billion write-down in the third quarter
of 2007 and is hoping that its new CEO, John A. Thain,
former head of the New York Stock Exchange as well as a
former co-president of Goldman Sachs, can bail it out.
Morgan Stanley’s co-president, Zoe Cruz, lost her job
because of a $3.7 billion write-down related to the
subprime fallout, and internal memos faulted her for not
having enough risk managers. Bear Stearns CEO James E.
Cayne kept his job but faced the very public humiliation
of having two of his hedge funds invested heavily in
subprime mortgage-related securities virtually wiped out
earlier in the summer.

According to a November 19thNew York Times article, “Goldman
Sachs Rakes in Profit in the Credit Crisis,” the
company’s “secret sauce” is “high octane business
acumen, tempered with paranoia and institutionally
encouraged—though not always observed—humility.” More
tellingly, the same article quotes Guy Moszkowski, an
analyst at Merrill Lynch as saying of Goldman Sachs’
risk practices, “The risk controllers are taken very
seriously…. They have a level of authority and power
that is, on balance, equivalent to the people running
the cash registers. It’s not as clear that that happens
everywhere.”

In other words, the top leadership
of Goldman Sachs knows what it is doing. In the
meantime, those who wish to follow in the steps of firms
likely to survive and thrive would do well to follow the
risk management prescriptions of The Conference Board.

Author’s Note: Mark Hanna
is a freelance business researcher and writer based in
Cedar Rapids, Iowa. He can be reached at
markhanna@mchsi.com.

Copyright 1996-2007, Wharton Center for
Leadership and Change Management
University
of Pennsylvania